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Financial Analysis LAP 6 Objectives Describe the importance of cash flow. Describe the components of a cash flow statement.

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Presentation on theme: "Financial Analysis LAP 6 Objectives Describe the importance of cash flow. Describe the components of a cash flow statement."— Presentation transcript:

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2 Financial Analysis LAP 6

3 Objectives Describe the importance of cash flow. Describe the components of a cash flow statement.

4 Describe the importance of cash flow. Objective

5 When you owe more money than you have–When you owe more money than you have– Your cash flow is out of balance. Your cash flow is out of balance. You may not be able to pay all of your bills. You may not be able to pay all of your bills. You may need to borrow money from a family member or a friend. You may need to borrow money from a family member or a friend. Not a situation you want to be in very often Not a situation you want to be in very often Businesses sometimes are in the same situation.Businesses sometimes are in the same situation. Businesses monitor their cash flow to avoid this problem. Businesses monitor their cash flow to avoid this problem.

6 Importance of Cash Flow Cashit makes the world go around.Cashit makes the world go around. Businesses need cash to operate.Businesses need cash to operate. Need to manage their cash flow:Need to manage their cash flow: The movement of funds into and out of a business The movement of funds into and out of a business Determine the amount of cash they have to work with at any given time Determine the amount of cash they have to work with at any given time

7 Cash Flows Into a Business From Five Main Sources Start-up moneyStart-up money Sale of productsSale of products LoansLoans InterestInterest Sale of assetsSale of assets

8 Main Sources of Cash Flowing Out of a Business Operating expensesOperating expenses Cost of goods soldCost of goods sold AssetsAssets Loan paymentsLoan payments TaxesTaxes MiscellaneousMiscellaneous

9 Monitor Cash Flow To build a cash surplus when sales are up Creates a safety net for the slow timeCreates a safety net for the slow time Keeps the cash flow balancedKeeps the cash flow balanced

10 Describe the components of a cash flow statement. Objective

11 Cash Flow Statement Best guess, or estimate, as to when, where, and how much money will flow into and out of the businessBest guess, or estimate, as to when, where, and how much money will flow into and out of the business Tells the business–Tells the business– When money will flow in When money will flow in Where money will flow in from Where money will flow in from How much money will flow in How much money will flow in

12 Finding Necessary Information May be a problem for new businessesMay be a problem for new businesses Do not have previous financial data Do not have previous financial data Often rely on figures obtained through marketing research Often rely on figures obtained through marketing research Existing businesses have financial information.Existing businesses have financial information. Review previous profit-and-loss statements. Review previous profit-and-loss statements. Analyze industry trends and predictions. Analyze industry trends and predictions.

13 Components of a Cash Flow Statement Beginning cash balanceBeginning cash balance Money available at the beginning of each month Money available at the beginning of each month Cash receiptsCash receipts Specific sources of money flowing into the business Specific sources of money flowing into the business Total cash receiptsTotal cash receipts All of the sources of income listed under cash receipts All of the sources of income listed under cash receipts Total cash availableTotal cash available Cash available to spend each month Cash available to spend each month Cash paymentsCash payments Sources of cash flowing out of the business Sources of cash flowing out of the business Total cash paid outTotal cash paid out Determined by adding all of a businesss cash payments Determined by adding all of a businesss cash payments Ending cash balanceEnding cash balance Cash a business has left at the end of the month Cash a business has left at the end of the month

14 What This Means Gives a business a good idea of amount of money that will flow in and outGives a business a good idea of amount of money that will flow in and out Positive cash flow means there is enough money on hand to meet monthly obligations. Positive cash flow means there is enough money on hand to meet monthly obligations. Negative cash flow means the business will need to obtain additional money to continue operating. Negative cash flow means the business will need to obtain additional money to continue operating. Indicates the financial condition of a businessIndicates the financial condition of a business Businesses with extra cash are able to invest. Businesses with extra cash are able to invest. Investments lead to growth and expansion. Investments lead to growth and expansion. This generates more sales and more cash. This generates more sales and more cash. Result is a prosperous business that has cash to continue growing. Result is a prosperous business that has cash to continue growing.

15 List all of your income for the month. List all of your expenses, even the small ones. Total the amounts on each list. Income should be more than expenses. If not, there are two options: Reduce your expenses. Find a way to bring in more income. Steps to managing your cash flow

16 What if they present information in a way that is legal but not quite ethical? What if they get the loan, but the bank finds out? Bank might not trust the business in the future. May always be concerns about accuracy of financial information Business might have trouble getting other loans. Businesses often use cash flow statements to obtain credit. Was it worth it to be less than completely truthful? Was there another way to be ethical and still get the loan?

17 MarkED Acknowledgments Original Developers Christopher C. Burke, Lynn Malowney, MarkED Version 1.0 Copyright © 2007 MarkED Resource Center

18 Digital-based photography sources: DIGITAL STOCK CORP.; Business & Industry Obj. B: #013 Photos copyright 1998 Corbis Corp. 750 Second Street, Encinitas, CA 92024 DIGITAL VISION; Teenager Today Obj. B: #130271 Photos copyright Digital Vision Ltd., all rights reserved. 833 Fourth Ave. SW, Suite 800 Calgary, AB, Canada T2P 3T5

19 Copyright: All photographic digital images on this CD are owned by the aforementioned photographic resources or their licensors and are protected by the United States copyright laws, international treaty provisions, and applicable laws. No title to or intellectual property rights to the images on this CD are transferred to you. These sources retain all rights and are not to be used, digitally copied, transferred, or manipulated in any way. To do so is a violation of federal copyright laws.

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